Capital Gains Tax on Stocks: Short-Term vs Long-Term Rates (2025‑2026)

What is Capital Gains Tax?

A capital gain arises when you dispose of a capital asset — such as shares of stock, an ETF, or a mutual fund — for more than your cost basis (essentially, what you paid for it). The difference between your proceeds and your cost basis is the gain, and the IRS taxes it in the year the gain is realized (i.e., when you actually dispose of the shares).

There are two broad categories of capital gains under US federal tax law:

• Short-term capital gains — from assets held for one year or less before being sold. These are taxed at ordinary income tax rates, the same rates that apply to wages and salaries.
• Long-term capital gains — from assets held for more than one year before being sold. These receive preferential (lower) tax rates under current law, designed to encourage longer investment horizons.

Capital losses — when you sell at a price below your cost basis — can be used to offset capital gains and, within limits, ordinary income. Understanding both sides of the ledger is essential for year-end tax planning. To learn more about what stocks are and how they are traded, see our article on What is a Stock?

Short-Term vs Long-Term Capital Gains

The single most important factor in determining your capital gains tax rate is the holding period — how long you owned the asset from the date of purchase to the date of sale.

Short-Term Capital Gains (Held 1 Year or Less)

If you sell stock within one year of the purchase date (including the day of purchase), the gain is short-term and taxed as ordinary income. For the 2025 tax year, ordinary income tax brackets range from 10% to 37% depending on your taxable income and filing status.

Long-Term Capital Gains (Held More Than One Year)

If you hold the stock for more than one year before selling, the gain qualifies for preferential long-term capital gains rates of 0%, 15%, or 20% — significantly lower than ordinary income rates for most taxpayers. This difference can be substantial for investors in higher income brackets.

The holding period begins on the day after the purchase date and ends on the date of sale. For inherited stock, special rules apply — discussed in the Gifting and Inherited Stock section below.

2025‑2026 Federal Capital Gains Tax Rates

The tables below show approximate federal income thresholds and applicable rates as of the 2025 tax year. These figures are subject to annual inflation adjustments by the IRS — always verify current thresholds at IRS.gov or with a qualified tax professional. The short-term rates are the standard 2025 ordinary income tax brackets.

Short-Term Capital Gains Rates (Ordinary Income Brackets — 2025)

Long-Term Capital Gains Rates (2025)

Net Investment Income Tax (NIIT)

In addition to regular federal capital gains tax, certain higher-income investors are subject to the Net Investment Income Tax (NIIT) — a 3.8% Medicare surtax introduced under the Affordable Care Act. This tax applies on top of (not instead of) regular capital gains tax.

As of the 2025 tax year, the NIIT applies to the lesser of your net investment income or the amount by which your Modified Adjusted Gross Income (MAGI) exceeds the following thresholds (these thresholds are not adjusted for inflation):

• Single filers: MAGI over $200,000
• Married filing jointly: MAGI over $250,000
• Married filing separately: MAGI over $125,000
• Head of household: MAGI over $200,000

Net investment income generally includes capital gains, dividends, interest income, rental income (unless derived from an active business), and income from passive activities.

High-income investors nearing the NIIT thresholds may benefit from consulting a qualified tax professional about strategies such as deferring gains to a lower-income year or maximizing contributions to tax-advantaged retirement accounts that reduce MAGI.

State Capital Gains Taxes

Federal tax is only part of the story. Most US states also tax capital gains, and the combined federal + state burden can be substantial depending on where you live.

States With No Income Tax (and Therefore No Capital Gains Tax)

As of 2025, the following states impose no state income tax on wages or investment income: Texas, Florida, Nevada, Washington*, Wyoming, South Dakota, Alaska, New Hampshire (taxes only dividends and interest, being phased out), and Tennessee (phased out investment income tax as of 2021). Residents of these states generally owe only federal tax on capital gains from stock sales.

* Washington state enacted a 7% capital gains tax on long-term gains above $250,000 (upheld by the state Supreme Court in 2023).

High-Tax States

Many high-tax states treat capital gains as ordinary income with no preferential rate. Notable examples include:

How to Calculate Your Capital Gains

The formula for a capital gain is straightforward:

What is Cost Basis?

Your cost basis is generally what you paid for the shares, including any commissions or fees paid to acquire them. If you purchased 50 shares at $40 each and paid a $10 commission, your total cost basis is $2,010, or $40.20 per share. Cost basis must be tracked carefully, especially when you make multiple purchases of the same stock at different prices over time.

Cost Basis Methods

When you have multiple lots of the same stock purchased at different times and prices, the IRS allows several methods to determine which shares are deemed sold:

• Specific Identification: You designate exactly which shares (lots) are being sold. This gives the most control over your tax outcome — for example, you could choose to sell the highest-cost lot first to minimize the gain. You must adequately identify the specific shares at or before the time of sale.
• First-In, First-Out (FIFO): The IRS default. Shares purchased earliest are considered sold first. In a long-running bull market this often means selling the lowest-cost (highest-gain) shares first.
• Average Cost: Commonly used for mutual funds and some ETFs. All shares in an account are averaged to determine a single per-share basis. Once selected for a fund, switching methods requires IRS notification.

Adjustments to Cost Basis

Several events adjust your cost basis over time:

• Stock splits: If a stock splits 2-for-1, you own twice as many shares at half the per-share cost basis (total basis is unchanged).
• Reinvested dividends (DRIP): Each reinvested dividend purchase creates a new tax lot with its own cost basis and purchase date. Failing to account for these lots is a common source of double-taxation errors.
• Return of capital distributions: These reduce your cost basis rather than being taxed immediately, which increases your eventual capital gain.

For a step-by-step estimate of your own situation, use our free Capital Gains Tax Calculator. For definitions of terms used in this section, visit our Glossary.

The Wash Sale Rule

The wash sale rule (IRC Section 1091) prevents taxpayers from claiming a loss on the sale of a security while maintaining substantially the same market exposure. Specifically, you cannot claim a capital loss on a security sale if you purchase substantially identical securities within the 30-day window before or after the sale (a 61-day window in total).

Key Wash Sale Rule Features

• The rule applies across all accounts — including taxable brokerage accounts, traditional IRAs, and Roth IRAs. Buying back the same stock in your IRA within 30 days of a loss sale in your taxable account triggers the wash sale rule.
• The disallowed loss is not permanently lost — it is added to the cost basis of the replacement shares, effectively deferring the loss until you sell those shares.
• The holding period of the replacement shares includes the holding period of the sold shares for purposes of determining short-term vs long-term treatment.
• “Substantially identical” generally includes the same stock or an option or futures contract on that stock. It typically does not include a different company in the same industry or a broad index fund covering a similar sector (though the IRS has not issued definitive guidance on all cases).

Tax-Loss Harvesting

Tax-loss harvesting is the practice of strategically realizing capital losses to offset capital gains during the same tax year, thereby reducing your overall tax liability. It is an educational concept widely discussed in financial planning literature — though any implementation should be evaluated in the context of your specific tax and financial situation with a qualified tax professional.

How It Works

If you hold positions that are currently below your cost basis (unrealized losses), selling them before year-end generates a realized loss that can offset realized gains elsewhere in your portfolio. The order of netting matters under IRS rules:

1. Short-term losses first offset short-term gains.
2. Long-term losses first offset long-term gains.
3. Remaining excess losses of either type then offset the other type.
4. Any net capital loss remaining after offsetting all capital gains may be deducted against up to $3,000 of ordinary income per year ($1,500 if married filing separately).
5. Losses exceeding the annual $3,000 limit carry forward indefinitely to future tax years and retain their character (short-term or long-term).

Interaction With the Wash Sale Rule

Tax-loss harvesting only works if you avoid triggering the wash sale rule. After selling a position at a loss, you must either:

• Wait at least 31 days before repurchasing the same or substantially identical security, or
• Replace the sold position with a similar — but not substantially identical — security to maintain your market exposure while preserving the tax loss.

For example, selling an S&P 500 ETF from one fund family and purchasing a comparable broad US equity ETF from a different fund family is a common approach for maintaining exposure while recognizing the loss — though the IRS has not issued definitive guidance on all cases. Consult a qualified tax professional to evaluate whether specific securities are considered substantially identical in your circumstances.

Reporting Capital Gains on Your Tax Return

Capital gains and losses from stock transactions are reported on your federal income tax return using two key forms:

• Form 8949 (Sales and Other Dispositions of Capital Assets): Each individual transaction — every stock sale — is reported here. You list the description of the asset, the date acquired, the date sold, the proceeds, the cost basis, any adjustments (such as disallowed wash sale losses), and the resulting gain or loss. Transactions are separated into short-term (Part I) and long-term (Part II).
• Schedule D (Capital Gains and Losses): This aggregates the totals from Form 8949 and any other capital gain or loss transactions. The net capital gain or loss from Schedule D flows to your Form 1040.
• Form 1099-B: Your brokerage is required to send you a 1099-B by mid-February each year summarizing all reportable sales from the prior tax year. It includes proceeds, cost basis (for covered securities), and holding period information. However, 1099-Bs can contain errors — particularly for older positions, transfers between brokers, stock splits, and DRIP purchases — so always verify the figures.

Capital Gains in Retirement Accounts

One of the most significant tax advantages of retirement accounts is that capital gains realized inside the account are not taxable in the year they occur. This allows investments to compound without an annual tax drag — a powerful structural advantage over taxable accounts for long-term investors.

Tax-Deferred Accounts (Traditional 401(k), Traditional IRA)

Contributions to a traditional 401(k) or traditional IRA are generally made with pre-tax (or tax-deductible) dollars. All gains, dividends, and interest accumulate tax-deferred inside the account. Taxes are owed when you take distributions (withdrawals) in retirement, at which point the full amount withdrawn is taxed as ordinary income — regardless of whether the growth came from capital gains or dividends. There are no long-term capital gains rates inside these accounts; everything comes out as ordinary income.

Tax-Free Growth (Roth IRA, Roth 401(k))

Roth accounts are funded with after-tax dollars. In exchange, qualified distributions in retirement are entirely tax-free — including all accumulated capital gains, dividends, and interest. This can be extraordinarily valuable for investors who expect significant appreciation over a long time horizon, as decades of compound growth can be withdrawn without any federal income tax.

Gifting Stock and Inherited Stock

The tax treatment of stocks received as a gift or through inheritance differs significantly from stock you purchase yourself — and understanding these rules represents some of the most consequential tax planning available under current US law.

Gifted Stock — Carryover Basis

When you receive stock as a gift, you generally take the donor's cost basis (called carryover basis). If the stock has appreciated since the donor purchased it, you will owe capital gains tax on the full appreciation — including the gain that accrued while the donor owned the shares — when you eventually sell.

The holding period also carries over: if the donor held the stock for more than one year, your holding period begins from the donor's original purchase date (making it immediately long-term for capital gains purposes). There are special rules if the stock is worth less than the donor's basis at the time of the gift — consult a qualified tax professional in that scenario.

Inherited Stock — Stepped-Up Basis

Inherited stock generally receives a stepped-up basisto the fair market value of the stock on the date of the decedent's death (or an alternate valuation date in some estates). This is one of the most significant tax planning concepts in US law: all capital appreciation that occurred during the decedent's lifetime permanently escapes capital gains tax.

The stepped-up basis rule has been subject to periodic legislative proposals to modify or repeal it. As of the 2025 tax year it remains in effect. Consult a qualified tax professional or estate attorney for guidance on how these rules apply to a specific estate.

Frequently Asked Questions